There has never been a better time to build a fintech company in Australia.
This may seem provocative, given COVID-19 presents us with unique and perhaps once-in-a-generation challenges, but I am enthusiastic about founders seeking to create change in this multi-billion-dollar industry. The reasons for this are many, but boil down to unique advantages Australia, and Australians, have in building fintech companies here.
Let’s consider the fintech landscape and context independently from COVID-19 for now.
Most financial products and services are still concentrated among a handful of players — usually the big four banks. As deposit-taking institutions, they are heavily regulated. Their infrastructure and systems are incredibly complex, and their cost structures fit for a different time.
To give a sense for scale, the local banking system generated about $50 billion pre-tax profit in 2019.
One upside of these large players is pools of talent with deep expertise in all the areas that the consumer or business doesn’t see much of when they’re consuming a financial product or service. Things such as managing balance sheets and liquidity, payments and credit infrastructure, domestic and cross border compliance, regulatory frameworks and relationships, risk management are all mission-critical and we have these skills in spades here.
Square Peg, the venture capital fund I work for, recently led the seed round for Zeller, which is seeking to disrupt the way merchants accept payments and conduct their business banking. The founders, Ben Pfisterer and Dom Yap, are some of the most deeply experienced folks in payments, coming from organisations such as NAB, Visa and Square. Together, they launched Square in Australia, building a significant business here and helping to drive Square’s global growth. This combination of domain expertise and the ability to build a large business from scratch is something that we look for and we’ve been able to find regularly in Australia.
Beyond just fintech, we believe that Australia is in an exciting phase of its journey towards becoming one of the world’s most prolific producers of high-quality tech businesses.
Many important tech companies founded here, and abroad, have trained a growing pool of senior talent on how to scale businesses. We are now seeing a lot of these people choosing to start a business or join an early-stage company. This is a really important moment in the cycle that we’ve seen play out in Israel and other tech ecosystems, because it rapidly accelerates progress in the early stages of new businesses.
Whether it’s the net interest margins on home loans, small and large business loans, FX spreads and fees, the prohibitive cost and access to quality, holistic financial advice and great investment products, insurance that doesn’t involve a fight to actually process a claim, there is so much to fix, and huge markets to disrupt!
But let us consider the impact of COVID-19 on fintech.
As we’ve seen in many other industries, COVID-19 has helped accelerate the move away from physical financial products and services and pure online businesses have been significant beneficiaries.
Before this pandemic, the vast majority of mortgages were still originated in person in a bank branch or with a mortgage broker. And yet in recent months during lockdowns, we’ve seen a surge in refinancing activity — many of these enquiries will have occurred online and potentially outside the traditional institutions.
We think it has opened the door further for online-only fintechs to have a greater chance at building trust and acquiring customers in the mainstream, potentially breaking some of the inertia of incumbents.
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This means more and more consumers might consider new banking services with the likes of Up Banking, TransferWise or Athena Home Loans. More businesses and companies will discover a much-improved set of capabilities through companies such as Airwallex (business banking, cards and FX), Prospa (SMB lending) or Judo (larger business lending and banking) because they can be reached without a physical presence.
It also opens the door to entirely new ventures that form direct relationships with customers and align themselves with customer outcomes in a way that incumbents struggle to.
Sadly, the impact of COVID-19 means there will be a lot of talented and dedicated people actively looking for their next opportunity.
It is our hope that they will consider a career change and join or start an early-stage business. Whether that’s a fintech business, a software company or an online marketplace, we are optimistic that the other side of this pandemic will be one of the most significant periods of business creation that we’ve seen.
And this isn’t just lip-service.
At Square Peg, we’ve invested more than $100 million in recent years in Australian fintech businesses such as Airwallex, Athena Home Loans, Prospa and Zeller.
This is an exciting time to be investing in Australian fintech businesses and we think the conditions for doing so will only improve.